Testing the Conditional Mean Function of Autoregressive Conditional Duration Models

University of Copenhagen Discussion Paper

36 Pages Posted: 13 Dec 2006

See all articles by Nikolaus Hautsch

Nikolaus Hautsch

University of Vienna - Department of Statistics and Operations Research; Center for Financial Studies (CFS); Vienna Graduate School of Finance (VGSF)

Date Written: December 2006

Abstract

In this paper, we suggest and evaluate specification tests to test the validity of the conditional mean function implied by Autoregressive Conditional Duration (ACD) models. We propose Lagrange multiplier tests against sign bias alternatives, various types of conditional moment tests and integrated conditional moment tests which are consistent against all possible alternatives. In a Monte-Carlo study we investigate the finite sample properties of the individual tests. Moreover, the testing framework is applied to a variety of existing and new ACD specifications using financial duration data based on NYSE trading. We show that conditional moment tests have the highest power to detect general types of misspecifications. Moreover, we provide evidence that most ACD specifications are too simple and are clearly rejected. It turns out that flexible parameterizations of the news impact function are necessary to appropriately model financial durations. A semiparametric ACD model proposed in this paper seem to be a valuable alternative to existing approaches.

Keywords: Augmented ACD models, semiparametric ACD models, news impact function, Lagrange multiplier tests, (integrated) conditional moment tests

JEL Classification: C22, C41, C52

Suggested Citation

Hautsch, Nikolaus, Testing the Conditional Mean Function of Autoregressive Conditional Duration Models (December 2006). University of Copenhagen Discussion Paper. Available at SSRN: https://ssrn.com/abstract=951399 or http://dx.doi.org/10.2139/ssrn.951399

Nikolaus Hautsch (Contact Author)

University of Vienna - Department of Statistics and Operations Research ( email )

Oskar-Morgenstern-Platz 1
Vienna, A-1090
Austria

Center for Financial Studies (CFS) ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
Vienna, 1020
Austria

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